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Decisions on merits in form of procedural orders

In January 2018 two appeal courts ruled on two separate cases in which arbitral awards had been challenged on the basis that the tribunals had departed from decisions made on issues of merits in procedural orders.

Procedural orders are most commonly used by arbitral tribunals to make decisions on procedural issues. Generally, procedural orders are not final and binding and a tribunal is free to amend previously issued procedural orders.(1) However, procedural orders are sometimes used as a tool for making interim decisions on the merits of the case. This was the case in CicloMulsion AG v NeuroVive Pharmaceutical AB(2) and Public Gas Corporation of Greece (DEPA) SA v BOTAS Petroleum Pipeline Corporation.(3)

CicloMulsion

In CicloMulsion both parties had challenged a partial award on several grounds. The underlying arbitration, governed by the Stockholm Chamber of Commerce arbitration rules, concerned claims under a licence agreement relating to pharmaceutical technology. Among other things, CicloMulsion (the licensor) had requested the tribunal to declare that NeuroVive (the licensee) was obliged to pay royalties in accordance with the licence agreement. This claim was denied by the tribunal in a partial award.

The partial award had been preceded by a procedural order (PO 10) in which the tribunal had decided that the licence agreement should be interpreted in such a way that a 'first launch' was not a prerequisite for NeuroVive's obligation to pay royalties under the agreement. The tribunal stated in PO 10 that if it decided that it needed to depart from this interpretation later in the arbitration, it would inform the parties and give them the opportunity to make further submissions on the issue.

After PO 10 was issued, NeuroVive submitted a further pleading partly relating to the first launch issue which had been decided in PO 10. The tribunal provided CicloMulsion with an opportunity to respond to NeuroVive's submission. As CicloMulsion considered the issues that had been decided in PO 10 to be closed, it did not address them further.

In the subsequent partial award, the tribunal departed from its decision relating to the first launch issue made in PO 10. CicloMulsion challenged the partial award on the basis that the tribunal had committed a procedural error which had influenced the outcome of the case.(4)

Court of Appeal decision
The Scania and Blekinge Court of Appeal noted that the tribunal's decision in PO 10 was provisional and that the tribunal was thus not bound by it in making its final ruling on the parties' claims in the partial award. However, the court also noted that the tribunal had implemented a specific procedure for reopening the issues that had been so decided (ie, that the tribunal would inform the parties that it was considering departing from its previous decision and provide the parties with the opportunity to make further submissions).

While it was clear that NeuroVive had in fact made further submissions on the topic and that the tribunal had provided CicloMulsion with the opportunity of doing the same, the tribunal had not explicitly informed the parties that it was in fact considering changing the decision made in PO 10. The court found that this conduct constituted an irregularity in the arbitration that could lead to the award being set aside. The court also found that it had likely influenced the outcome of the case and thus CicloMulsion's motion to set aside the award was granted.(5) The Scania and Blekinge Court of Appeal granted leave to appeal the judgment and NeuroVive submitted its appeal to the Supreme Court in February 2018.

DEPA

The underlying arbitration in DEPA – governed by the International Chamber of Commerce (ICC) arbitration rules – concerned two price revision requests under a gas purchase agreement between DEPA (the buyer) and BOTAS (the seller). The contractual purchase price was defined through a formula consisting of a fixed part and an adjustable part. BOTAS had made two separate requests for revision of the contractual price before initiating arbitration. The arbitral tribunal had decided to split the arbitration into two different phases – Phase 1 would deal with the first price revision request made by BOTAS and Phase 2 with the second request.

After having held an oral hearing on Phase 1, the tribunal and the parties decided that the tribunal would issue an "executive summary of its decision on phase 1" in a procedural order before issuing an arbitral award. In PO 11, the tribunal held that "[t]he revised Contract Price as a result of the First Price Revision request is to be directly based on BAFA". 'BAFA' refers to an average price of all gas imports to Germany, set by the German Federal Office of Economic and Export Control. This coincided with DEPA's position in the arbitration, while BOTAS had argued that the new price should be adjusted based on 'Brent', which refers to the price of crude oil. The tribunal stated in PO 11 that "the above decision, the full reasons for which will be set out in the Partial Award on First Price Revision, is final and not open to further argument, submission or review".

After a failed attempt to get the parties' experts to come up with a joint proposal for the wording of the revised contract price formula, further submissions on the topic from the parties and the appointment of a tribunal-appointed expert, the tribunal issued PO 15 in which the tribunal decided on the revised wording. The revised formula was not directly based on BAFA, but rather on a Brent-based formula argued for by BOTOS.

The award on Phase 1 was subsequently based on the revised price formula decided by the tribunal in PO 15 and was challenged by DEPA. According to DEPA, the tribunal had exceeded its mandate when it departed from the decision made in PO 11. In the alternative, DEPA claimed that this conduct constituted an irregularity during the proceedings which had influenced the outcome of the case.(6)

Court of Appeal decision
According to the Svea Court of Appeal, the fact that the decision had been made in the form of a procedural order rather than in the form of an award had no decisive impact on whether the tribunal was bound by it. Rather, the decisive factor – other than the fundamental requirement that the parties' right to present their respective cases has not been violated – was whether the decision fulfilled the requirements of a final decision corresponding to an interim award.

The court concluded that while PO 11 contained the tribunal's decision on certain substantive issues and could have been made in the form of an interim award, the tribunal was not bound by it because the decision had not been submitted to the ICC for scrutiny as stipulated by the arbitration rules.

The court pointed out that it had been inappropriate for the tribunal under these circumstances to write in PO 11 that the decision therein was final and not open to further argument, submission or review. However, this did not change the provisional status of the decision. The court also found, due to the content of intermediate procedural orders and submissions by the parties, that it must have been clear to the parties that the tribunal still considered formulas based on Brent. The tribunal had neither exceeded its mandate nor committed any challengeable procedural error. DEPA's motion to set aside the award was denied. Leave to appeal the judgment to the Supreme Court was not granted and so the judgment is final.

Comment

The two cases have several similarities. In both cases, the tribunals made interim decisions on the merits of the case in the form of procedural orders and later, in the arbitral award, departed from their previous decisions. In both cases, the courts found that the interim decisions were provisional and that the tribunals were permitted to depart from them in the subsequent awards.

In CicloMulsion, the Scania and Blekinge Court of Appeal found that while the tribunal was free to depart from its previous decision, it was nevertheless required to follow the specific procedure that it had formulated in the procedural order before reopening the issues (ie, to inform the parties that it was considering changing its previous decision). In DEPA, no such specific procedure was in place and, irrespective of the fact that the tribunal had stated that the interim decision was "final and not open to further argument, submission or review", the tribunal was free to reconsider its decision in the arbitral award. A decisive factor for the Svea Court of Appeal's decision to deny the motion for setting aside the award seem to have been that both parties had sufficient opportunity to present its case, irrespective of the tribunal's change of heart regarding its interim decision.

The practice of issuing procedural orders containing decisions on the merits of the case tends to blur the line between provisional procedural decisions and binding awards. This in turn may lead to an elevated risk of challenges against arbitral awards on the basis of decisions on the merits (ie, decisions that would not normally be open to challenge or appeal in arbitration).

While case law indicates that such a challenge procedure will be successful only in exceptional cases, arbitrators are advised to make it clear to the parties that they consider themselves free to depart from a decision in a subsequent award and to avoid making decisions that they consider to be final and binding in the form of a procedural orders but instead issue a separate award.

(1) However, it has been debated in several cases whether a procedural order may reflect an agreement between the parties and that the arbitral tribunal cannot therefore amend such an order without exceeding its mandate or otherwise committing a procedural error, which may result in the award being set aside (for further details please see "Amendment of procedural orders in arbitration".

Compare jurisdictions: Litigation: Enforcement of Foreign Judgments

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